Bharti Airtel, RCOM may report lower Q4 profits; Idea to report earnings growth

April 25, 2013
ET Bureau
Kalyan Parbat &Gulveen Aulakh

Kolkata/Delhi: Two of India's top telecom companies —Bharti Airteland Reliance Communications are expected to report lower profit in the fourth quarter of 2012-13 while rivalIdea Cellular is tipped to report earnings growth during the period. But all threetelcosare expected to report higher minutes of usage or"MoU"and see a revival in RPM or "revenue per minute", propelled by a rise in volume-led revenues amid an uptick in subscriber additions, reduced competition from new operators and a sharp cutback in discounts.

The forecast is based on reports put out by eight brokerages — Credit Suisse, Morgan Stanley,BarclaysCapital, UBS,Citi Research, Motilal Oswal, ICICISecurities, AngelBrokingandIndiaNivesh. They believe the envisaged revenue uptick is partly aided by new operators pulling out of some circles and call traffic flowing back to the incumbents.

A case in point isUninorandVideocon exiting several telecom markets where they failed to retain airwaves post-expiry of their licencesin January, which worked to the advantage ofBhartiand Idea, who alsobenefittedfrom the operations scale down by Tata DocomoandAircelin several circles.

Bharti Airtel
Bharti Airtel, the country's largest telco by revenue and customers, is expected to report lower profits for the 13th straight quarter even as revenues and margins in its home market show signs of improvement while African operations face muted growth. Swiss brokerage firmCredit Suissepredicts Bharti's consolidated net profit will d;rop to Rs 769.4 crore, 23.5 per cent lower than the same quarter a year before. But it expectsBharti to report increase in RPM and minutes of usage by 1 per cent and 0.5 per cent, respectively, over the previous quarter.

But both UBS and Barclays predict Bharti'sAfricaperformance to remain weak in March 2013. "We expect Africa performance to remain muted in the (fourth) quarter as it is a seasonally weak one," say analysts Suresh A Mahadevan and Varun Ahuja in a UBS Securities note. Barclays Capital, however, is more upbeat as it expects the company's RPM to rise in the fourth quarter for the first time in years.

"With reduced competition and increasing instances of sporadic reduction in discounts, Bharti should be able to arrest the long-term trend of declining RPMs this quarter," the firm said in a note to clients. Brokerage firmMorgan Stanleygoes a step further. It expects Bharti Airtel's profit after tax (PAT) to be three times higher than the previous quarter at around Rs 750 crore "owing to higher EBITDA, lower finance costs and taxes".

Morgan Stanley estimatesBharti'saverage revenue per minute or"ARPM"to rise marginally by 0.4 per cent quarter-on-quarter. While voiceARPMis set to rise by 20 basis points over the last quarter, dataARPMmay go up by 1.2 per cent. It's bit of a mixed bag forBhartisinceCitiResearch is far more conservative, pegging thetelco'sfourth quarter PAT to be 35.5 per cent lower than the previous year atRs650crore. Barclays expects thetelco'srevenue to grow 3.1 per cent over the last quarter and margins up by 20 basis points while UBS Investment Research sees India revenue rising by 4 per cent andEBIDTAmargins going up by 30 basis points.

"Net revenue could rise by 2.4 per cent over third quarter and by 11 per cent over last year toRs20,700crore," said analysts atMorgan Stanleyand added that EBITDA can rise by 3.9 per cent q-o-q and 3.1 per cent over the previous year toRs6,420crore. Credit Suisse's expectation in revenue growth toRs14,478crore, 2.9 per cent higher in the fourth quarter over the last one and has said that compared to the year before,Bharti'srevenues in India andSouth Asiawould be 8.5 per cent higher than the same time last year.

We expectBhartito post a revenue growth of 1.9 per cent q-o-q while the EBITDA margin of Bharti is expected to decline by 83 basis points q-o-q to 29.7 per cent, saidAngel Brokingin a note to clients. While Citi Research said it expected 'healthy wireless EBITDA growth 4 per cent q-o-q for Bharti driven by first signs of operational improvement — modest increase in revenue per min, healthy minutes growth and some margin expansion'.

Morgan Stanley expects Bharti to take its overall subscriber base in India to 190 million with net addition of 7.7 million after a decline in the previous quarter. Traffic growth can go up to 6.8 billion minutes, 7.5 per cent higher than the previous year.

Idea Cellular
Idea Cellularmay outperform its closest rivals by reporting higher profit triggered by an overall operational improvement reflected in a higher RPM, healthy minutes growth, increased data-services revenue and some margin expansion. Brokerage firm Morgan Stanley projected that Idea's year-on-year (y-o-y) net profit for the quarter to rise nearly 10 per cent to Rs 262.2 crore (Rs 239 crore).

UBS, however, is more conservative, projecting a modest 1.6 per cent y-o-y growth in Idea PAT during the fourth quarter. Morgan Stanley expects Idea to report net addition of 7.5 million, leading to a 7 per cent growth in the overall subscriber base to 121 million, after the decline in the previous quarter.

"We expect Idea's traffic to grow by 6.3 billion minutes, which works out to 4.8 per cent q-o-q and 11.4 per cent y-o-y growth," said the brokerage, adding that call "traffic growth would be the telco's main revenue driver". The likes of UBS Securities and Barclays, in turn, see the telco's quarterly revenue growing 5.5 per cent on a quarter-on-quarter (q-o-q) basis while Morgan Stanley pegs its q-o-q revenue growth a tad lower at 5.2 per cent.

"We expect Idea to report a 5.5 per cent revenue growth on a q-o-q basis along with a small uptick (26 bps) in margins. Decreasing discounts, a return to healthy subscriber additions and marginal increase in MoU should result in high volume growth for the company," said a Barclaysnote accessed by ET. The brokerage also projected the company's traffic volumes to grow 4.9 per cent on a q-o-q basis, which it claimed "is the highest among the telecom companies we cover".

UBS expects Idea's data services revenue to growth significantly. "We are building in data usage to grow by 23 per cent sequentially for Idea," said the UBS note. Morgan Stanley, in turn, projected Idea's EBIDTA or "earnings before interest, tax, depreciation &amortisation" for the fourth quarter to "grow 4.9 per cent on a q-o-q basis and 14 per cent on y-o-y basis".

Brokerage firmCredit Suisse, however, expects thetelcoto report a modest increase on theMoUand RPM parameters, although it awaits more clarity from the company's management on strategic issues like the consequences of the failed2Gspectrum sale and the 3G roaming case. Brokerage firmIndiaNivesh, however, claimed the regulatory environment remained tough, given the high reserve price for spectrum and issues relating to re-farming andlicencerenewal, coupled with the likelihood of a legal logjam. "We believe there is a risk of prolonged litigation between industry and the government on issues relating to spectrumrefarmingandlicence renewal," warned theIndiaNiveshSecurities note.

Reliance Communications
Reliance Communicationsis projected to report a 66.4 per cent crash in its fourth-quarter net profit y-o-y, at Rs 111.4 crore (Rs 332 crore approx), although it is likely to post a modest 1.2 per cent rise in quarterly revenue on a q-o-q basis, predicts brokerage firm Morgan Stanley. The Anil Ambani-owned telco's margins, however, are expected to remain stable and it is likely to see a positive RPM momentum, helped along by a modest rise in wireless revenue. "Our net profit forecast for RCOM is Rs 111.4 crore, up 5.5 per cent on q-on-q basis, but down 66 per cent on a year-on-year basis.

Operationally, we expect RCOM to report net additions of only 2.5 million, leading to a 2 per cent growth in overall subscriber base, after a decline in the previous quarter due to cleanup of inactive subscribers," said Morgan Stanley. Analysts atBarclays, however, await clarity from the RCOM management on "the pace of increase in data and non-voice revenues and its views on 3G roaming agreements".Morgan Stanleyalso notes that RCOM will not make any accounting adjustments for forex losses in the P&;L account since the telco has stated that "forex losses will be charged to the general reserves in the balance sheet at the year-end in line with the scheme of arrangement".

Analysts at brokerage ICICI Securities, however, believe a future tower sharing deal with Mukesh Ambani's Reliance Jio Infocomm "could significantly unlock value in the passive infrastructure business for RCOM", which has an arsenal of over 50,000 towers. But the brokerage acknowledges that the Rs 1,200 crore that Reliance Jio will pay RCOM to use its nationwide optic fibre network is insignificant compared to the Anil Ambani-owned company's mammoth Rs 37,600 crore net debt.

Not surprisingly, analysts Karan Mittal and Anil Shenoy of ICICI Securities claim "a passive infrastructure deal could help unlock the value in (RCOM tower arm) Reliance Infratel," adding that declining competitive intensity in the sector coupled with recent tariff hikes promised to "improve RCOM's dwindling fundamentals".